Eastern promise, Western doldrums

Many Western firms are looking East for investment opportunities. Some, like Quadrangle Capital Partners, are scaling up in Asia while scaling back in the West.

While Quadrangle Capital Partners is clearly a firm undergoing a fundamental re-think in strategy, its recent activities can be seen as representative of the way many Western firms are now viewing Asia.

In early February, the New York-headquartered media and communications specialist led a $300 million debt and equity investment in Tower Vision India, gaining itself a “significant minority” stake in the telecom tower management company in the process, according to a spokeswoman for the firm.

The deal was Quadrangle’s maiden investment in Asia, but it is clear it will not be its last. After sending managing principal Ed Sippel out to establish a Hong Kong office in September 2008, the firm has expanded its headcount in the continent to four. In September 2009, the firm stated in a letter to its LPs that it saw attractive investment opportunities in Asia and would be focusing on the region.

For a communications specialist looking at Asia, the attractions of India’s telecommunications sector alone are more than compelling. The country is the world’s second largest market in terms of mobile phone subscribers and also one of its fastest-growing. And the potential is huge: according to data from the Telecom Regulatory Authority of India, as of April 2009 62 percent of all Indians were still without access to any kind of telephone. As such, Quadrangle follows on the heels of other Western private equity firms, such as Kohlberg Kravis Roberts and Norwest Venture Partners, which have moved to buy into this growth story.

But there is of course a lot more to India than the attractions of its telecoms sector, just as in turn there is a lot more to Asia than the attractions of its two key markets of India and China.

And if 2009 was notable for being a year when many Western private equity firms struggled to keep their heads above water, it was also notable for being a year when those Western firms in a position to carry on investing began to turn their gaze ever Eastwards.

This is borne out by the latest report from the Emerging Markets Private Equity Association, which found that although fundraising for all emerging markets dropped in line with that of developed markets in 2009, registering a 66 percent decline on the figures recorded in 2008, investment activity did not register anywhere near the drop recorded elsewhere.

In fact, although total investment value and number of transactions in the emerging markets dropped by 54 percent and 11 percent respectively; they actually saw their share of global private equity activity – compared to the developed world – increase to 26 percent in 2009 from 14 percent in 2008.

Investments in emerging Asia made up the bulk of this activity, accounting for 63 percent of the value and 70 percent of the number of transactions. There are two factors behind this. One is emerging Asia’s continued economic growth, and the other is the dominance of growth-related private equity strategies that do not have a strong reliance on leverage. With this in mind, EMPEA noted that “managers of more flexible capital in global funds see greater opportunities in the emerging markets than elsewhere”.

This observation has translated into a trend that has seen, in only the past two months, firms including US- and UK-headquartered fund of funds Northgate Capital and UK-based private equity investor network Pi Capital announce plans to move into Asia; and emerging markets specialist Aureos Capital state its intention to set up a regional hub in Singapore as part of a “rapid” expansion in Asia.

In the case of Quandrangle, however, moves to ramp up its Asian activities have come in tandem with steps to reduce the headcount in firm’s London office, which was opened in 2007. In fact, at the time of going to press, the firm’s website listed only one London employee: vice president Sebastien Briens.

While at this stage Quadrangle appears to be an extreme case, it is likely only a matter of time before we see more Western firms shift their resources – along with their focus – from West to East.